While small-cap stocks, such as Asseco Poland SA. (WSE:ACP) with its market cap of ZŁ3.72B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Software companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ACP here.
How does ACP’s operating cash flow stack up against its debt?
Over the past year, ACP has ramped up its debt from ZŁ1.38B to ZŁ1.52B , which is made up of current and long term debt. With this rise in debt, ACP currently has ZŁ1.60B remaining in cash and short-term investments for investing into the business. Moreover, ACP has produced ZŁ691.40M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 45.56%, signalling that ACP’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ACP’s case, it is able to generate 0.46x cash from its debt capital.
Does ACP’s liquid assets cover its short-term commitments?
At the current liabilities level of ZŁ2.60B liabilities, the company has been able to meet these commitments with a current assets level of ZŁ4.39B, leading to a 1.69x current account ratio. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ACP face the risk of succumbing to its debt-load?
ACP’s level of debt is appropriate relative to its total equity, at 13.99%. ACP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether ACP is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ACP’s, case, the ratio of 14.2x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ACP ample headroom to grow its debt facilities.
ACP’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how ACP has been performing in the past. I suggest you continue to research Asseco Poland to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ACP’s future growth? Take a look at our free research report of analyst consensus for ACP’s outlook.
- Valuation: What is ACP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ACP is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.